Bond markets will seriously position for rate cuts post the budget for 2013-14 that is to be tabled in the parliament on the 28thof February. The market will watch out for the government borrowing program for fiscal 2013-14. The market is expecting a slightly higher borrowing next year against the Rs 579,000 crores gross borrowing for 2012-13. The government on the other hand is indicating that it is likely to show a lower borrowing amount on the back of the cash surplus it is carrying into the coming fiscal.
The rate cut expectation in the RBI policy in March is driven by weak IIP growth and falling inflation numbers. IIP (Index of Industrial Production) growth for December 2012 came in at a negative 0.6% taking the growth for the April-December period to a negligible 0.7% against a growth of 3.7% seen in the previous year.
Inflation as measured by the WPI (Wholesale Price Index) printed at 6.62% for the month of January 2013. Inflation stood at 7.18% in December 2012. RBI has forecast an inflation number of 6.5% for the month of March 2013. Manufacturing inflation fell to its lowest levels in over a year to 4.81% underlying the weak demand trend in the economy.
The bond purchases by the RBI to shore up fiscal year end liquidity tightness is positive for the markets. RBI bought Rs 9997 crores in an OMO (Open Market Operation) bond purchase auction held last week. RBI is expected to hold more OMOs in the next few weeks to shore up system liquidity. RBI has bought around Rs 150,000 crores of bonds in fiscal 2012-13 and more bond purchases will keep the market light on bonds as it goes into fiscal 2013-14.
Liquidity as measured by bids for repo in the LAF (Liquidity Adjustment Facility) auction of the RBI tightened last week. Bids for repo averaged Rs 120,000 crores on a daily average basis last week against an average of Rs 82,600 crores seen in the week previous to last. Government cash balances with the RBI coupled with year end demand for liquidity by the system is placing pressure on liquidity.
Government bond yields fell marginally week on week with the benchmark ten year bond, the 8.15% 2022 bond seeing yields fall by 2bps. Bond markets chose to focus on the budget rather than react to bond yield positive IIP and inflation numbers.
Corporate bonds saw yields trade flat on worries of liquidity. Five and ten year benchmark AAA bonds yields closed unchanged at levels of 8.72% and 8.78% respectively. Corporate bond yields will stay sticky at current levels in the next couple of weeks due to tight liquidity conditions.
OIS (Overnight Index Swaps) markets saw the curve close almost unchanged last week. OIS markets will wait for the budget before making the next move. One year OIS yields will fall sharply post budget on rate cut expectations.
Government bond auctions
The government auctioned Rs 12,000 crores of bonds last week. The bonds auctioned were the 8.12% 2020 bond for Rs 3000 crores, the 8.20% 2025 bond for Rs 6000 crores and the 8.30% 2042 bond for Rs 3000 crores. The cut offs came in at 7.86%, 7.91% and 8.02% respectively. The government is scheduled to auction Rs 12,000 crores of bonds this week and this auction will be the last auction for this fiscal.